Why and How to Sell Annuity Payments for Income

Why and How to Sell Annuity Payments for Income

Purchasing an annuity earlier in life can help provide a reliable stream of income in retirement. Sometimes, though, you can't wait for the future — unexpected costs may arise, or you may want access to that money to invest it elsewhere.

With this in mind, you may be able to exchange annuity payments that you would normally receive in the future for immediate cash. Let's explore when and why you may want to sell annuity payments as well as some considerations to keep in mind when making this decision.

Why Might You Sell Annuity Payments?

Certain circumstances may lead you to want a cash payout before you would normally start receiving annuity payments. For example, you may choose to put your money toward an investment opportunity that has a higher rate of return, or perhaps you inherited your annuity and are facing tax implications that don't align with your financial goals.

Other common reasons people may sell annuity payments include:

  • To help finance the launch of a new business or a large purchase, such as a vacation home.
  • To help with education costs for children or grandchildren.
  • To help pay off high-interest debt.
  • To help manage the financial impact of a life-changing event such as a job loss or sudden major illness.

Before you make the decision to sell, it's a good idea to calculate the present value of your annuity so you can fully understand how much it's worth.

What Are Your Options for Selling Annuity Payments?

Regardless of the reason for selling your payments, you'll likely want to start by checking your contract so you can better understand your options. Not every type of annuity may be easily sold or even sold at all. For example, selling annuities from a legal settlement may require you to obtain permission from a judge.

Some annuities do allow holders to withdraw money as desired. You may not receive the full amount you could have received through future payments, though. For instance, if you're within the surrender period — the time you are contractually obligated to keep funds in the annuity to avoid penalties — you may face restrictions on how much you can withdraw, and you may incur fees on withdrawals.

In addition, the tax implications of early withdrawals can also impact the amount of money that you receive from a payout. While it can vary based on your specific annuity agreement, your tax burden when selling annuity payments is typically the same as it would be if you made a withdrawal or received regular payments from the annuity.

Depending on your agreement, you may be able to choose between three ways of selling your annuity payments:

  1. An entirety sale: An entirety sale relinquishes all future annuity payments in exchange for a one-time payout of what is currently in the contract.
  2. A partial sale: With a partial sale, you receive money from selling a portion of annuity payments for a defined time period, such as five years, and annuity payments can continue after this period.
  3. A lump sum sale: A lump sum sale is a type of partial sale that assigns a specific dollar amount (rather than a time period) to the payout.

Partial vs. Lump Sum vs. Entirety Sales

The potential advantages of any sale will depend on your unique situation. For example, partial sales can provide money to meet urgent financial needs while still leaving money for future income payments. A lump sum sale offers more control over the cash paid to you and, potentially, the overall annuity payouts. If you want to continue payments after receiving a specific amount, such as $50,000 to pay for college tuition, a lump sum sale could work well for you.

Some annuity holders may find entirety sale transitions to be the simplest way to sell annuity payments because there's no need to figure out the optimal partial term period or negotiate a lump sum amount.

How Does an Annuity Sale Fit Into Your Financial Plans?

Life can bring unexpected challenges and opportunities, especially in retirement. Whether you need money to invest or to pay expenses, wisely managing a large cash payout requires a clear understanding of your financial situation and goals.

Check your agreement and examine your financial picture carefully, and seek input from a financial or tax professional if you need help. Thoroughly considering whether you should sell annuity payments can go a long way toward being able to meet your changing lifestyle needs and financial goals.

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